This summary is based on the fourth quarter fiscal 2007 earnings call conducted by The Home Depot Inc. (HD) on February 26, 2008.
Management:
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Chairman, Chief Executive Officer: Frank Blake
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Executive Vice President Merchandising: Craig Menear
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Senior Vice President Supply Chain: Mark Holifield
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Chief Financial Officer: Carol B. Tome
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Senior Vice President of Investor Relations: Diane Dayhoff
Key Investors Issues
- Sales were $17.7 billion, up 1.5% from $17.4 billion in 2006.
- Earnings declined 28% from $925 million or 42 cents a share in 2006 to $671 million or 40 cents a share.
- Sales per operating store fell by 10.4%.
Full Year Highlights:
- Sales declined by 2.1% to $77.3 billion from $79 billion in the prior year.
- Earnings dropped 24% to $4.4 billion or $2.56 a share.
- Sales per operating store fell by 9%.
Fourth Quarter Highlights
Sales were $17.7 billion, a 1.5% increase from $17.4 billion in the prior year due to the positive impact of an extra week.
- Earnings amounted to $671 million or 40 cents a share, down 28% from $925 million or 42 cents a share in the prior year, as the slowing housing environment significantly impacted comparable sales.
- Gross margin was 34.3%, an increase of 67 basis points from last year, reflecting 47 basis points of margin expansion due to lower deferred interest associated with the private label credit card.
- Margins were also affected by 20 basis points of margin expansion due to a number of factors, including a change in the mix of products sold and less promotions.
Operating expenses increased by 197 basis points to 27.2% of sales, reflecting the impact of negative sales, where for every point of negative comp the firm expects to deleverage expenses by about 20 basis points.
- The firm experienced an additional 37 basis points of expense deleverage due to several strategic business decisions, including the closing of the Tampa call center and write-offs associated with certain future store locations that will not be opened.
- Diluted shares were 1.68 billion shares compared to 2 billion shares last year with the reduction in outstanding shares due to the share repurchase program and includes the tender offer completed in September.
- The firm opened 26 new stores, including five relocations, for an ending store count of 2,234 and selling square footage was 235 million, a 4.9% increase from last year.
The firm ended the period with $44.3 billion in assets, including $457 million in cash and short-term investments.
- Cash and short term investments were down $160 million, reflecting cash generated by the business of $6.2 billion, net proceeds from the sale of HD Supply of $8 billion, and commercial paper issuances of $1.7 billion.
- This was offset by $10.8 billion paid for share repurchases, $3.6 billion of capital expenditures, and $1.7 billion of dividends.
- The firm is maintaining the cap on the $22.5 billion recapitalization plan.
Strategic Highlights:
- Despite the difficulties in the market and the tough environment, management believes the stage is set for the long-term health of the business as it focuses exclusively on the retail business.
- It set out the five priorities for investment in the retail business and committed resources to them, and they are the same priorities for 2008 and beyond i.e. associate engagement, shopping environment, product availability, product excitement and Own the Pro.
- On associate engagement, the firm has realigned compensation and reward programs to ensure that associates are being appropriately recognized.
During the year, it hired over 2,500 master trade specialists, licensed plumbers and electricians, to work in the stores and reintroduced Homer Badges to reward associates for great customer service.
- In 2008, it will be introducing a new TK Badge that will reward associates for developing enhanced product knowledge and also focus redeploying non customer facing expenses to selling hours, an initiative called Aprons on the Floor.
- On shopping environment, the firm completed an aggressive list of maintenance projects, with new lighting and basic cleanup activities for over half the stores, as well as more complex repair and maintenance activities for hundreds of other stores.
- Going forward, it will continue to invest at levels significantly above prior years and has now an established programmatic maintenance cadence for the stores.
- It has also set out new store standards across the company that address the clutter that had been allowed to develop over the years.
On product availability, the firm piloted a new distribution concept., and through to 2010, will be rolling out new distribution centers to lower costs, increase asset efficiency and improve the customer experience.
- The firm begin to pilot the new ERP system in Canada this spring and completed will roll the new platform to all Canadian stores and expect to be fully operational there with the new system by the end of the year.
- On the Own the Pro initiative, the firm has grown its bid room volume by over 200% this year, and in 2008 will continue to leverage customer analytics to drive a deeper relationship with these valuable customers.
- The international businesses performed very well and the firm led the market in both Mexico and Canada.
– The firm will be downsizing new store growth and will open about 55 new stores in 2008, of which only about 35 will be in the United States.
